ADVANCED FINANCIAL MANAGEMENT

CAPITAL STRUCTURE
Net Income approach
1. Rupa Ltd.’s EBIT is Rs. 5,00,000. The company has 10%, Rs. 20 lakh debentures. The equity
capitalization rate i.e. Ke is 16%.
You are required to CALCULATE:
 Market value of equity and value of firm
 Overall cost of capital.

2. A company’s expected annual net operating income (EBIT) is Rs. 50,000. The company has
Rs.2,00,000, 10% debentures. The equity capitalisation rate (Ke) of the company is 12.5%.
Find the value of the firm and overall cost of capital under Net Income approach.

3. Super manufacturing company expects to earn net operating income of INR 1,50,000
annually. The company has INR 6,00,000, 8% debentures. The cost of equity capital of the
company is 10%. What would be the value of the company? Also calculate overall cost of
capital.

4. A company that has an investment of Rs. 2,00,000 and a net operating income of Rs. 50,000.
It is considering two scenarios: (1) no debt and (2) equal levels of debt and equity of Rs.
1,00,000 each. The company finds out that the cost of equity is 12% and the cost of debt is
8%. What would be the value of the company? Also calculate overall cost of capital.

5. Assuming no taxes and given the earnings before interest and taxes (EBIT), interest
(I) at 10% and equity capitalization rate (K e) below, calculate the total market value
of each firm under Net Income Approach:
Firms EBIT I Ke
(Rs.) (Rs.)
X 2,00,000 20,000 12.0%
Y 3,00,000 60,000 16.0%
Z 5,00,000 2,00,000 15.0%
W 6,00,000 2,40,000 18.0%
Also determine the weight average cost of capital for each firm.

Traditional Approach
6. HUL Ltd. has EBIT of Rs. 1,00,000. The company makes use of debt and equity
capital. The company has 10% debentures of Rs. 5,00,000 and the company’s equity
capitalization rate is 15%.
You are required to compute:
i. Current value of the company
ii. Overall cost of capital.

7. DETERMINE the optimal capital structure of a company from the following

information:
 OptionsCost of Debt (Kd) in %Cost of Equity (Ke) in Percentage of Debt on total value (Debt +Equity)
%
1 11 13.0 0.0
2 11 13.0 0.1
3 11.6 14.0 0.2
4 12.0 15.0 0.3
5 13.0 16.0 0.4
6 15.0 18.0 0.5
7 18.0 20.0 0.6

Net Operating Income Approach (NOI)

8. Amita Ltd.’s operating income (EBIT) is Rs. 5,00,000. The firm’s cost of debt is
10% and currently the firm employs Rs. 15,00,000 of debt. The overall cost of
capital of the firm is 15%.
You are required to CALCULATE:
(i) Total value of the firm.
(ii) Cost of equity.

9. Alpha Limited and Beta Limited are identical except for capital structures. Alpha
Ltd. has 50 per cent debt and 50 per cent equity, whereas Beta Ltd. has 20 per
cent debt and 80 per cent equity. (All percentages are in market-value terms).
The borrowing rate for both companies is 8 per cent in a no-tax world, and capital
markets are assumed to be perfect.
(a)
i. If you own 2 per cent of the shares of Alpha Ltd., DETERMINE your return if the
company has net operating income of Rs.3,60,000 and the overall capitalisation rate
of the company, Ko is 18 per cent?
ii. CALCULATE the implied required rate of return on equity?
(b) Beta Ltd. has the same net operating income as Alpha Ltd.
i. DETERMINE the implied required equity return of Beta Ltd.?
ii. ANALYSE why does it differ from that of Alpha Ltd.?

10. The following information is available for Avinash Metals.

 NET OPERATING INCOME: Rs. 40 million
 Interest on the debt: Rs. 10 million
 Cost of equity: 18 percent
 Cost of debt: 12 percent
What is the average cost of capital of Avinash?
What happens to the average cost of capital of Avinash, if it employs Rs? 100 million of debt
to finance a project which earns an operating income of Rs. 20 million? Assume that the net
operating income method applies and there are no taxes.
11. The management of Vibgyor Fabrics subscribes to the NOI Approach and believes that the
cost of debt and overall cost of capital will remain at 9% and 12% respectively. If the debt
 equity ratio is 0.8, what is the cost of equity?

12. Company X and Company Y are in the same risk class, and are identical in every
fashion except that Company X uses debt while Company Y does not. The levered
firm has Rs. 9,00,000 debentures, carrying 10% rate of interest. Both the firms earn
20% before interest and taxes on their total assets of Rs.15 lakhs. Assume perfect
capital markets, rational investors and so on; a tax rate of 50% and capitalization
rate of 15% for an all equity company.
i. Compute the value of firms X and Y using the net income (NI) approach.
ii. Compute the value of each firm using the net operating income (NOI) approach.
iii. Using the NOI approach, calculate the overall cost of capital (ko) for firms X and Y.
iv. Which of these two firms has an optimal capital structure according to the NOI
approach? Why?

Modigliani-Miller Approach (MM)

13. There are two company N Ltd. and M Ltd., having same earnings before interest
and taxes i.e. EBIT of Rs. 20,000. M Ltd. is a levered company having a debt of
Rs.1,00,000 @ 7% rate of interest. The cost of equity of N Ltd. is 10% and of
M Ltd. is 11.50%. COMPUTE how arbitrage process will be carried on?

14. Following data is available in respect of two companies having same business risk:
Capital employed = Rs. 2,00,000, EBIT = Rs. 30,000
Ke = 12.5%
Sources Levered Company (Rs.) Unlevered Company (Rs.)
Debt 1,00,000 Nil
(@10%)
Equity 1,00,000 200000
Investor is holding 15% shares in levered company. CALCULATE increase in annual
earnings of investor if he switches his holding from Levered to Unlevered
company.

15. There are two companies U Ltd. and L Ltd., having same NOI of Rs.20,000
except that L Ltd. is a levered company having a debt of Rs.1,00,000 @ 7% and
cost of equity of U Ltd. & L Ltd. are 10% and 18% respectively. COMPUTE how
arbitrage process will work.

16. From the following data find out the value of each firm and value of each equity
share as per the Modigliani-Miller approach:
P Q R
EBIT 13,00,000 13,00,000 13,00,000
No. of shares 3,00,000 2,50,000 2,00,000
12% debentures 9,00,000 10,00,000
Every firm expect 12% return on investment.
17. Ram Limited and Shyam Limited belong to the same risk class- these companies are identical
in all respects except that Ram Limited has no dent in its capital structure, whereas, Shyam
Limited employs debt in its capital structure. The relevant financial procedures of the two
companies are given below:
Ram Limited Shyam Limited
Net Operating Income Rs.10,00,000 Rs.10,00,000
Debt interest - Rs.3,00,000
Equity earnings Rs.10,00,000 Rs.7,00,000
Debt capitalization rate - 10%
Equity capitalization rate 14% 18%
Market value of debt - Rs.30,00,000
Market value of equity Rs. 71,42,857 Rs. 38,88,888
Total market value of the firm Rs. 71,42,857 Rs. 68,88,888
Average cost of capital 14% 14.52%
Praveen owns Rs. 1000000 worth of Ram Limited equity. What arbitrage will he resort to?

18. Consider the following information for Optima Limited:

Net Operating income Rs. 210
million
Corporate tax rate 30%
Market as well as book value Rs. 300
million
Capitalization rate applicable to debt free firm in the risk class to which 16%
Optima belongs:
What will be the value of Optima Limited according to Modigliani and Miller approach?

EBIT-EPS ANALYSIS AND ROI – ROE ANALYSIS

1. Suppose that a firm has an all equity capital structure consisting of 100,000 ordinary shares of Rs.
10 per share. The firm wants to raise Rs. 250,000 to finance its investments and is considering
three alternative methods of financing – (i) to issue 25,000 ordinary shares at Rs. 10 each, (ii) to
borrow Rs. 2,50,000 at 8 per cent rate of interest, (iii) to issue 2,500 preference shares of Rs. 100
each at an 8 per cent rate of dividend. If the firm’s earnings before interest and taxes after
additional investment are Rs. 3,12,500 and the tax rate is 50 per cent, FIND the effect on the
earnings per share under the three financing alternatives.

2. Best of Luck Ltd., a profit-making company, has a paid-up capital of Rs. 100 lakhs consisting of 10
lakhs ordinary shares of Rs. 10 each. Currently, it is earning an annual pre-tax profit of Rs. 60
lakhs. The company's shares are listed and are quoted in the range of Rs. 50 to Rs. 80. The
management wants to diversify production and has approved a project which will cost Rs. 50
lakhs and which is expected to yield a pre-tax income of Rs. 40 lakhs per annum. To raise this
additional capital, the following options are under consideration of the management:
 i. To issue equity share capital for the entire additional amount. It is expected that the new
shares (face value of Rs. 10) can be sold at a premium of Rs. 15.
ii. To issue 16% non-convertible debentures of Rs. 100 each for the entire amount.
iii. To issue equity capital for Rs. 25 lakhs (face value of Rs. 10) and 16% non- convertible
debentures for the balance amount. In this case, the company can issue shares at a
premium of Rs. 40 each.

CALCULATE the additional capital can be raised, keeping in mind that the management wants to
maximise the earnings per share to maintain its goodwill. The company is paying income tax at
50%.

3. Shahji Steels Limited requires Rs. 25,00,000 for a new plant. This plant is expected to yield
earnings before interest and taxes of Rs. 5,00,000. While deciding about the financial plan, the
company considers the objective of maximizing earnings per share. It has three alternatives to
finance the project - by raising debt of Rs. 2,50,000 or Rs. 10,00,000or Rs. 15,00,000 and the
balance, in each case, by issuing equity shares. The company's share is currently selling at Rs. 150,
but is expected to decline to Rs. 125 in case the funds are borrowed in excess of Rs. 10,00,000.
The funds can be borrowed at the rate of 10 percent upto Rs. 2,50,000, at 15 percent over Rs.
2,50,000 and upto Rs. 10,00,000 and at 20 percent over Rs. 10,00,000. The tax rate applicable to
the company is 50 percent. ANALYSE which form of financing should the company choose?

4. The following data are presented in respect of Quality Automation Ltd.:

Amount (Rs.)
Profit before interest and tax 52,00,000
Less : Interest on debentures @ 12,00,000
12%
Profit before tax 40,00,000
Less : Income tax @ 50% 20,00,000
Profit After tax 20,00,000
No. of equity shares (of Rs. 10 each) 8,00,000
EPS 2.5
P/E Ratio 10
Market price per share 25
The company is planning to start a new project requiring a total capital outlay of Rs. 40,00,000. You
are informed that a debt equity ratio (D/D+E) higher than 35% push the Ke up to 12.5% means reduce
PE ratio to 8 and rises the interest rate on additional amount borrowed at 14%. FIND OUT the
probable price of share if:

i. the additional funds are raised as a loan.

ii. the amount is raised by issuing equity shares. (Note: Retained earnings of the company is Rs. 1.2
crore)
5. Ganesha Limited is setting up a project with a capital outlay of Rs. 60,00,000. It has two
alternatives in financing the project cost.

Alternative-I: 100% equity finance by issuing equity shares of Rs. 10 each

Alternative-II: Debt-equity ratio 2:1 (issuing equity shares of Rs. 10 each)

The rate of interest payable on the debts is 18% p.a. The corporate tax rate is 40%. CALCULATE
the indifference point between the two alternative methods of financing.

6. Ganapati Limited is considering three financing plans. The key information is as follows:

Total investment to be raised Rs. 2,00,000

Plans of Financing Proportion:

Plan
EquityDebtPreference Shares
s
A 100% - -

B 50% 50% -
C 50% - 50%

 Cost of debt: 8%
 Cost of preference shares: 8%
 Tax rate: 50%

Equity shares of the face value of Rs. 10 each will be issued at a premium of Rs. 10 per share,
Expected EBIT is Rs. 80000. You are required to DETERMINE for each plan: -

i. Earnings per share (EPS)

ii. The financial break-even point.
iii. Indicate if any of the plans dominate and compute the EBIT range among the plans for
indifference.

7. Yoyo Limited presently has Rs.36,00,000 in debt outstanding bearing an interest rate of 10 per
cent. It wishes to finance a Rs.40,00,000 expansion programme and is considering three
alternatives: additional debt at 12 per cent interest, preference shares with an 11 per cent
dividend, and the issue of equity shares at Rs.16 per share. The company presently has 8,00,000
shares outstanding and is in a 40 per cent tax bracket. If earnings before interest and taxes are
presently Rs.15,00,000, DETERMINE earnings per share for the three alternatives, assuming no
immediate increase in profitability? ANALYSE which alternative do you prefer? COMPUTE how
much would EBIT need to increase before the next alternative would be best?
8. Alpha Limited requires funds amounting to Rs.80 lakh for its new project. To raise the funds, the
company has following two alternatives:
 To issue Equity Shares of Rs.100 each (at par) amounting to Rs.60 lakh and borrow the
balance amount at the interest of 12% p.a.; or
 To issue Equity Shares of Rs.100 each (at par) and 12% Debentures in equal proportion.
 The Income-tax rate is 30%.

IDENTIFY the point of indifference between the available two modes of financing and state which
option will be beneficial in different situations.

9. Crompton Ltd. a profit-making company has a paid-up capital of Rs.100 lakhs consisting of 10
lakhs ordinary shares of Rs.10 each. Currently, it is earning an annual pre-tax profit of Rs.60 lakhs.
The company’s shares are listed and are quoted in the range of Rs.50 to Rs.80. The management
wants to diversify production and has approved a project which will cost Rs.50 lakhs and which is
expected to yield a pre-tax income of Rs.40 lakhs per annum. To raise this additional capital, the
following options are under consideration of the management:
 To issue equity share capital for the entire additional amount. It is expected that the new
shares
 (face value of Rs.10) can be sold at a premium of Rs.15.
 To issue 16% non-convertible debentures of Rs.100 each for the entire amount.
 To issue equity capital for Rs.25 lakhs (face value of Rs. 10) and 16% non-convertible
debentures for the balance amount. In this case, the company can issue shares at a premium
of Rs.40 each.

Advise the management as to how the additional capital can be raised, keeping in mind that the
management wants to maximise the earnings per share to maintain its goodwill. The company
pays income tax at 50%.

10. ABC Ltd. wants to raise Rs. 5,00,000 as additional capital. It has two mutually exclusive alternative
financial plans. The current EBIT is Rs. 17,00,000 which is likely to remain unchanged. The
relevant Information is –

Present Capital Structure: 3,00,000 Equity shares of Rs. 10 each and 10% Bonds of Rs. 20,00,000.

Tax Rate: 50%

Current EBIT: Rs. 17,00,000
Current EPS: Rs. 2.50
Current Market Price: Rs. 25 per share
Financial Plan I: 20,000 Equity Shares at Rs. 25 per share.
Financial Plan II: 12% Debentures of Rs. 5,00,000.
What is the indifference level of EBIT? Identify the financial break-even levels.
11. A companys present capital structure consists of 2,00,00,000 shares of equity stock. It requires Rs.
10,00,00,000 of external financing for which it is considering the three alternatives.
i. Issue 50,00,000 equity shares of Rs. 10 par at Rs. 20 each
ii. Issue 30,00,000 equity shares of Rs. 10 par at Rs. 20 each and 40,00,000 preference
shares of Rs. 10 par carrying 115 dividend.
iii. Issue 10,00,000 equity shares of Rs. 10 par at Rs. 20 each and Rs. 80 million of debentures
carrying 14% interest rate.
The company’s tax rate is 40%
i. What is the EPS-PBIT equation for the three alternatives?
ii. What is the EPS-PBIT indifference point for alternatives i and ii?

12. ZBB Limited needs Rs. 5 lacs for the construction of a new plant to stop the following three
financial plans are feasible. 
i. the company may issue 50000 equity shares at Rs. 10 per share.
ii. the company issued 25000 equity shares at Rs. 10 per share and 2500   debentures of Rs.
100 denomination bearing and 8% rate of interest.
iii. the company may issue 25000 equity shares at Rs. 10 per share and 2500 preference
shares at Rs. 100 per share bearing 8% rate of interest.

if the company's earnings before interest and Taxes are Rs. 10000, Rs. 20000 Rs.40000, Rs. 60000
and Rs.100000, what are the earnings per share under each of the three financial plans?  which
alternative would you recommend and why? Assume corporate tax to be 50%.

13. Vintex Limited has a target ROE of 20%. The debt equity ratio of the firm is 1.2 and its pre-tax cost
of debt is 12%. What ROI should the company plan to earn if its tax rate is 30%?

DIVIDEND DECISIONS

1. AB Engineering Ltd. belongs to a risk class for which the capitalization

rate is 10%. It currently has outstanding 10,000 shares selling at Rs. 100
each. The firm is contemplating the declaration of a dividend of Rs. 5/
share at the end of the current financial year. It expects to have a net
income of Rs. 1,00,000 and has a proposal for making new investments of
Rs. 2,00,000. CALCULATE the value of the firms when dividends (i) are not
paid (ii) are paid

2. XYZ Ltd. earns Rs. 10/ share. Capitalization rate and return on
investment are 10% and 12% respectively. DETERMINE the optimum
dividend payout ratio and the price of the share at the payout.
3. The following figures are collected from the annual report of XYZ Ltd.:

Net Profit Rs. 30 lakhs

Outstanding 12% preference Rs. 100
shares lakhs
No. of equity shares 3 lakhs
Return on Investment 20%
Cost of capital i.e. (Ke) 16%
COMPUTE the approximate dividend pay-out ratio so as to keep the share price at Rs. 42
by using Walter’s model?

4. The following figures are collected from the annual report of XYZ Ltd.:

Net Profit Rs. 30 lakhs

Outstanding 12% preference shares Rs. 100 lakhs
No. of equity shares 3 lakhs
Return on Investment 20%
Cost of capital i.e. (Ke) 16%
CALCULATE price per share using Gordon’s Model when dividend pay-out is (i) 25%; (ii)
50% and (iii) 100%..

5. X Ltd. is a no growth company, pays a dividend of Rs. 5 per share. If the

cost of capital is 10%, COMPUTE the current market price of the share?

6. XYZ is a company having share capital of Rs.10 lakhs of Rs.10 each. It

distributed current dividend of 20% per annum. Annual growth rate in
dividend expected is 2%. The expected rate of return on its equity capital
is 15%. CALCULATE price of share applying Gordons growth Model.

7. A firm had been paid dividend at Rs.2 per share last year. The estimated
growth of the dividends from the company is estimated to be 5% p.a.
DETERMINE the estimated market price of the equity share if the
estimated growth rate of dividends (i) rises to 8%, and (ii) falls to 3%. Also
FIND OUT the present market price of the share, given that the required
rate of return of the equity investors is 15%.
8. RST Ltd. has a capital of Rs. 10,00,000 in equity shares of Rs. 100 each.
The shares are currently quoted at par. The company proposes to
declare a dividend of Rs. 10 per share at the end of the current financial
year. The capitalization rate for the risk class of which the company
belongs is 12%. COMPUTE market price of the share at the end of the
year, if
(i) dividend is not declared ?
(ii) dividend is declared ?
(iii) assuming that the company pays the dividend and has net profits
of Rs.5,00,000 and makes new investments of Rs.10,00,000 during
the period, how many new shares must be issued? Use the MM
model.

9. The following information pertains to M/s XY Ltd.

Earnings of the Company Rs.

5,00,000
Dividend Payout ratio 60%
No. of shares outstanding 1,00,000
Equity capitalization rate 12%
Rate of return on 15%
investment
CALCULATE:

(i) What would be the market value per share as per Walter’s model?
(ii) What is the optimum dividend payout ratio according to Walter’s
model and the market value of Company’s share at that payout
ratio?

10. Taking an example of three different firms i.e. growth, normal and
declining firm. CALCULATE the Gordon’s model with the help of a
following example:
Factor Growth Normal Declining
s Firm Firm Firm
r > Ke r = Ke r < Ke
r (rate of return on retained earnings) 15% 10% 8%
Ke (Cost of Capital) 10% 10% 10%
E (Earning Per Share) Rs. Rs. 10 Rs. 10
10
b (Retained Earnings) 0.6 0.6 0.6
1- b 0.4 0.4 0.4
11. M Ltd. belongs to a risk class for which the capitalization rate is 10%. It
has 25,000 outstanding shares and the current market price is Rs. 100. It
expects a net profit of Rs. 2,50,000 for the year and the Board is
considering dividend of Rs. 5 per share. M Ltd. requires to raise Rs.
5,00,000 for an approved investment expenditure. ILLUSTRATE, how the
MM approach affects the value of M Ltd. if dividends are paid or not paid.

12. The following information is supplied to you:

Rs.
Total Earnings 2,00,000
No. of equity shares (of Rs. 100 each) 20,000
Dividend paid 1,50,000
Price/ Earnings ratio 12.5
Applying Walter’s Model
a. ANALYSE whether the company is following an optimal dividend policy.
b. COMPUTE P/E ratio at which the dividend policy will have no
effect on the value of the share.
c. Will your decision change, if the P/E ratio is 8 instead of 12.5?

13. With the help of following figures CALCULATE the market price of a share
of a company by using:
a. Walter’s formula
b. Dividend growth model (Gordon’s formula)
Earnings per share: Rs. 10
Dividend per Share: Rs. 6
IRR on investment: 25%
Retention ratio: 40%

14. The following information is available for Avanti Corporation:

Earning per share: Rs. 4
Rate of return on investment: 18%
Rate of return required by the shareholders: 15%
What will be the price per share as per the Walter model if the payout ratio is 40%,50%
and 60%.

15. The following information is available for Kavitha musicals:

Earning per share: Rs. 5
Rate of return required by the shareholders: 16%
 Assuming that the Gordon valuation model holds, what rate of return should be earned
on investments to ensure that the market price is Rs. 50 when the dividend payout is
40%?

16. Sahu & Co. earns Rs.6 per share having capitalization rate of 10 per cent and has a
return on investment at the rate of 20 per cent. According to Walter’s model, what
should be the price per share at 30 per cent dividend payout ratio? Is this the
optimum payout ratio as per Walter?

17. X Ltd., has 8 lakhs equity shares outstanding at the beginning of the year 2005. The
current market price per share is Rs.120. The Board of Directors of the company is
contemplating Rs.6.4 per share as dividend. The rate of capitalization, appropriate
to the risk-class to which the company belongs, is 9.6%:
(i) Based on M-M Approach, calculate the market price of the share of the
company, when the dividend is – (a) declared; and (b) not declared.
(ii) How many new shares are to be issued by the company, if the company
desires to fund an investment budget of Rs.3.20 crores by the end of the
year assuming net income for the year will be Rs.1.60 crores?

INVENTORY MANAGEMENT

Maximum Level = Re-Order Level + Re-Order Qty – (Minimum Rate of Consumption × Minimum Re- Order
Period)

Minimum Level = Re-Order level – (Normal Rate of Consumption × Normal Re-Order Period)
Re-Ordering level = Minimum Level + Consumption during lead time
= Minimum Level + (Normal Rate of Consumption × Normal Re-order Period)
Another formula for computing the Re-Order level is as below:
Re-Order level = Maximum Rate of Consumption × Maximum Re-Order period (lead time)
Danger Level = Normal Rate of Consumption × Maximum Reorder Period for emergency purchases

1. Calculate the Economic Order Quantity from the following information. Also state the
number of orders to be placed in a year.
Consumption of materials per annum :10,000 kg Order placing cost
per order : Rs. 50
Cost per kg. of raw materials : Rs. 2
Storage costs :8% on average inventory

2. The average annual consumption of a material is 18,250 units at a price of Rs. 36.50 per
unit. The storage cost is 20% on an average inventory and the cost of placing an order is
Rs. 50. How much quantity is to be purchased at a time?
3. The components A and B are used as follows:
Normal usage...................................300 units per week each
Maximum usage...............................450 units per week each
Minimum usage................................150 units per week each
Reorder Quantity..............................A 2,400 units; B 3,600 units.
Reorder period.................................A 4 to 6 weeks, B 2 to 4 weeks.
Calculate for each component:
(a) Re-order Level (b) Minimum Level (c) Maximum Level (d) Average Stock Level.

4. Two components A and B are used as follows:

Normal usage = 50 per week each Re-order quantity = A- 300; B-500
Maximum usage = 75 per week each
Minimum usage = 25 per week each
Re-order period: A - 4 to 6 weeks; B - 2 to 4 weeks
Calculate for each component
a) Re-order level; (b) Minimum level; (c) Maximum level; (d) Average stock level.

5. Anil company buys its annual requirement of 36,000 units in six installments. Each unit
costs Rs.1 and the ordering cost is Rs.25. The inventory carrying cost is estimated at
20% of unit value. Find the total annual cost of the existing inventory policy. How much
money can be saved by using E.O.Q?

6. The annual demand for an item is 3,200 units. The units cost is Rs.6 and inventory carrying charges is
25% p.a. If the cost of one procurement is Rs.150, determine:
(a) EOQ (b) No. of orders per year (c) Time between two consecutive orders.

7. A company manufactures a special product which requires a component ‘Alpha’.

The following particulars are collected for the year 2015.
1. Annual demand of Alpha 8,000 units
2. Cost of placing an order Rs. 200 per order
3. Cost per unit of Alpha Rs. 400
4. Carrying cost % p.a. 20%
The company has been offered a quantity discount of 4% on the purchase of ‘Alpha’
provided the order size is 4,000 components at a time.
Required:
(a) Compute the economic order quantity.
(b) Advise whether the quantity discount offer can be accepted.

8. From the details given below, calculate:

(i) Re-ordering level
(ii) Maximum level
(iii) Minimum level
(iv) Danger level
 Re-ordering quantity is to be calculated on the basis of following information:
i. Cost of placing a purchase order is Rs. 20
ii. Number of units to be purchased during the year is 5,000
iii. Purchase price per unit inclusive of transportation cost is Rs. 50
iv. Annual cost of storage per units is Rs. 5
v. Details of lead time: Average 10 days, Maximum 15 days, Minimum 6 days.
vi. For emergency purchases 4 days
vii. Rate of consumption: Average: 15 units per day,
viii. Maximum: 20 units per day

9. M/s Tubes Ltd. are the manufacturers of picture tubes for T.V. The following are the
details of their operation during the year 2015:

Average monthly market demand 2,000 Tubes

Ordering Cost Rs.100 per order
Inventory carrying cost 20% per annum
Cost of tubes Rs. 500 per tube
Normal usage 100 tubes per week
Minimum usage 50 tubes per week
Maximum usage 200 tubes per week
Lead time to supply 6 – 8 weeks
Compute from the above:
(i) Economic order quantity. If the supplier is willing to supply quarterly
1,500 units at a discount of 5% is it worth accepting?
(ii) Re-order level
(iii) Minimum level of stock
(iv) Maximum level of stock

10. The finance department of Prashanth Textile Corporation gathered the following information:
The carrying cost per unit of inventory: Rs. 10
The fixed cost per order: Rs. 20
Number of units required per unit ordered is Rs. 2
The purchase cost per unit ordered is Rs. 30

Determine the economic order quantity (EOQ), total number of orders in a year, and the time gap
between two orders.

11. Modern enterprises requires 90000 units of a certain item annually. It costs Rs. 3 per unit. The cost
per purchase order is Rs. 300 and the inventory carrying cost is 20 per cent per year.
 What is the economic order quantity, if there is no quantity discount?
 What should the firm do if the supplier offers the discounts as below:
Order quantity Discount in percentage
4500-5999 2
6000 and 3
 above

12. Cheran corporation requires 2000 units of certain item in a year. The purchase price per unit is Rs. 30,
the carrying cost of the inventory is 25% of the inventory value and the fixed cost per order is Rs.
1000.
i. Determine the EOQ.
ii. What will be the total cost of carrying and ordering inventories when 4 orders of equal size
are placed?

13. The information about annual usage and price for 15 items used by a firm is as given here:
Ite Annual usage (Number of units) Price per unit in Rs.
m
1 400 20
2 15 150
3 6000 2
4 750 18
5 1200 25
6 25 160
7 300 2
8 450 1
9 1500 4
10 1300 20
11 900 2
12 1600 15
13 600 7.5
14 30 40
15 45 20
 Rank the items of inventory on the basis of annual usage value
 Record the annual usage value
 Show the cumulative percentages of usage of items
 Classify the items into three classes, A, B, C

RECEIVABLES MANAGEMENT
1. Apex limited classifies its customers into five risk categories, 1 through 5. Presently Apex extends
unlimited credit to customers in categories 1 through 3, limited credit to customers in category 4,
and no credit to customers in category 5. Due to this policy, the company is foregoing sales of Rs.
3 million to customers in category 4 and Rs. 6 million to customers in category 5. Apex is
considering the adoption of more liberal credit policy under which customers in category 4 would
be extended unlimited credit and customers in category 5 would be extended limited credit. such
relaxation would increase sales by Rs. 9 million on which bad debt losses would be 10%. The
contribution margin ratio (1-V) for Apex is 20%. The average collection period ACP is 50 days and
the post tax cost of funds k, is 12%. The tax rate for Apex is 40%.
What will be the effect of relaxing the credit policy on residual income?

2. Manish Corporation currently provides 45 days credit to its customers. Its present sales are Rs. 80
 million. The firm’s cost of capital is 13 per cent and the ratio of variable costs to sales is 0.75.
Manish is considering extending its credit period to 60 days. Such an extension is likely to push
sales up by Rs. 20 million. The bad debt proportion on additional sales would be 10 per cent. the
tax rate for Manish is 35%.
What will be the effect of lengthening the credit period on the residual income of Manish?

3. The present credit terms of Multimedia company are 2/15, net 45. Its sales are Rs. 200 million. Its
average collection period, ACP is 30 days, its variable costs to sales ratio, V is 0.80 and its cost of
capital k, is 12%. The proportion of sales on which customers currently take discount p 0 is 0.5.
Multimedia is considering relaxing its discount terms to 3/15, net 45. Such a relaxation is
expected to increase sales by Rs. 10 million, reduce the ACP to 27 days, and increase the
proportion of discount sales to 0.6. Multimedia’s tax rate is 40%.
What will be the effect of liberalizing the cash discount on residual income?

4. Vibgyor limited is considering relaxing its collection effort. Its sales are Rs. 100 million, its average
collection period, ACP is 30 days, its variable cost to sales ratio V, is 0.75. its cost of capital k is 14
percent, and its bad debt ratio b0 is 0.04. vibgyors tax rate is 30%. The relaxation in collection
effort is expected to push sales up by Rs. 10 million, increase the average collection period to 40
days, and raise the bad debts ratio to 0.05. what will be the effect of relaxing the collection effort
on the residual income?
5. Vineetha enterprises sells on terms 2/10, net 45. Annual sales are Rs. 90 million. 30% of its
customers pay on the 10th day and take the discount. If accounts receivable average to Rs. 12
million, what is the average collection period (ACP) on non-discount sales?
6. The following information is available for Avinash company:
Month Sales in Rs. millions End of the quarter receivables in Rs. millions
Q1 January 40 3
Q1 February 50 20
Q1 March 60 40
Q2 April 60 5
Q2 May 50 18
Q2 June 40 25
Q3 July 50 4
Q3 August 50 20
Q3 September 50 30
Required:

i. Calculate the days sales outstanding (DSO) at the end of each quarter for averaging
periods of 30 days and 60 days.
ii. Draw up the ageing schedules (A/S) at the end of each quarter using the age brackets 0-
30, 31-60 and 61-90 days.

7. A trader whose current sales are in the region of Rs. 6 lakhs per annum and an average
collection period of 30 days wants to pursue a more liberal policy to improve sales. A study
made by a management consultant reveals the following information: -
 Credit Increase in collection period Increase in sales Present default anticipated
Policy
A 10 days Rs. 30,000 1.5%
B 20 days Rs. 48,000 2%
C 30 days Rs. 75,000 3%
D 45 days Rs. 90,000 4%
The selling price per unit is Rs. 3. Average cost per unit is Rs. 2.25 and variable costs per unit are Rs.
2. The current bad debt loss is 1%. Required return on additional investment is 20%. Assume a 360
days year.
ANALYSE which of the above policies would you recommend for adoption?

8. XYZ Corporation is considering relaxing its present credit policy and is in the process of evaluating two
proposed policies. Currently, the firm has annual credit sales of Rs. 50 lakhs and accounts receivable
turnover ratio of 4 times a year. The current level of loss due to bad debts is Rs. 1,50,000. The firm is
required to give a return of 25% on the investment in new accounts receivables. The company’s
variable costs are 70% of the selling price. Given the following information, IDENTIFY which is the
better option?
(Amount in Rs. )

Present PolicyPolicy Option IPolicy Option I

Annual credit sales 50,00,000 60,00,000 67,50,000

Accounts receivable turnover ratio4 times 3 times 2.4 times

Bad debt losses 1,50,000 3,00,000 4,50,000

9. A Factoring firm has credit sales of Rs. 360 lakhs and its average collection period is 30 days. The
financial controller estimates, bad debt losses are around 2% of credit sales. The firm spends Rs.
1,40,000 annually on debtors administration. This cost comprises of telephonic and fax bills along
with salaries of staff members. These are the avoidable costs. A Factoring firm has offered to buy
the firm’s receivables. The factor will charge 1% commission and will pay an advance against
receivables on an interest @15% p.a. after withholding 10% as reserve. ANALYSE what should the
firm do? Assume 360 days in a year.

10. Mosaic Limited has current sales of Rs. 15 lakhs per year. Cost of sales is 75 per cent of sales and bad
debts are one per cent of sales. Cost of sales comprises 80 per cent variable costs and 20 per cent
fixed costs, while the company’s required rate of return is 12 per cent. Mosaic Limited currently
allows customers 30 days’ credit, but is considering increasing this to 60 days’ credit in order to
increase sales. It has been estimated that this change in policy will increase sales by 15 per cent, while
bad debts will increase from one per cent to four per cent. It is not expected that the policy change
will result in an increase in fixed costs and creditors and stock will be unchanged. Should Mosaic
Limited introduce the proposed policy? ANALYSE (Assume a 360 days year)
11. The Dolce Company purchases raw materials on terms of 2/10, net 30. A review of the
company’s records by the owner, Mr. Gautam, revealed that payments are usually made 15 days
after purchases are made. When asked why the firm did not take advantage of its discounts, the
accountant, Mr. Rohit, replied that it cost only 2 per cent for these funds, whereas a bank loan
would cost the company 12 per cent.
i. ANALYSE what mistake is Rohit making?
ii. If the firm could not borrow from the bank and was forced to resort to the use of trade credit
funds, what suggestion might be made to Rohit that would reduce the annual interest cost?
IDENTIFY.

CASH MANAGEMENT

Format of Cash Budget

__________Co. Ltd.
Cash Budget Period______________
Month 1 Month 2 Month 3 Month 12
Receipts:
1. Opening balance
2. Collection from
debtors
3. Cash sales
4. Loans from banks
5. Share capital
6. Miscellaneous receipts
7. Other items
Total
Payments:
1. Payments to creditors
2. Wages
3. Overheads
(a)
(b)
(c)
4. Interest
5. Dividend
6. Corporate tax
7. Capital expenditure
8. Other items
Total
Closing balance
[Surplus (+)/Shortfall (-)]

1. LTC brothers have requested to prepare their cash budget for the period ending January 20X1
through June 20X1. The following information is available:
The estimated sales for the period of January 20X1 through June 20X1 are as follows:
i. 150000 per month from January through March, and 200000 per month from April
through June.
ii. The sales for the month of November and December of 20X0 have been 120000 each.
iii. The division of sales between cash and credit sales is as follows: 30% cash and 70% credit.
iv. Credit collection pattern is 40 and 60% after one and two months respectively.
v. Bad debt losses are nil.
vi. Other anticipated receipts are 70000 from the sale of machine in April, and 3000 interest
on securities in June.
vii. The estimated purchases of materials are 60000 per month from January to March and
80000 per month from April to June.
viii. The payments for purchases are made approximately a month after the purchase.
ix. The purchases for the month of December 20X0 have been 60000, for which payments
will be made in the month of January 20X1.
x. Miscellaneous cash purchases of 3000 per month are planned, January through
June.manufacuring expenses are expected to be 32000 per month, January through June.
xi. General administrative and selling expenses are expected to be 15000 per month.
xii. Dividend payment of 30000 and tax payment of 35000 are scheduled in June 20X1.
xiii. A machine worth 80000 is planned to be purchased on cash in March 20X1.
The cash balance as on 1st January 20X1 is 28000. The minimum cash balance required by the firm
is 30000. Prepare a statement showing the surplus/ deficits in relation to the minimum cash
balance required.

2. PREPARE monthly cash budget for six months beginning from April 2017 on the basis of the
following information:-
(i) Estimated monthly sales are as follows:-
Rs. Rs.
January 1,00,000 June 80,000
February 1,20,000 July 1,00,000
March 1,40,000 August 80,000
April 80,000 September 60,000
May 60,000 October 1,00,000
(ii) Wages and salaries are estimated to be payable as follows:-
Rs. Rs.
April 9,000 July 10,000
 May 8,000 August 9,000
June 10,000 September 9,000
(iii) Of the sales, 80% is on credit and 20% for cash. 75% of the credit sales are collected
within one month and the balance in two months. There are no bad debt losses.
(iv) Purchases amount to 80% of sales and are made on credit and paid for in the month
preceding the sales.
(v) The firm has 10% debentures of Rs. 1,20,000. Interest on these has to be paid quarterly
in January, April and so on.
(vi) The firm is to make an advance payment of tax of Rs. 5,000 in July, 2017.
(vii) The firm had a cash balance of Rs. 20,000 on April 1, 2017, which is the minimum
desired level of cash balance. Any cash surplus/deficit above/below this level is made
up by temporary investments/liquidation of temporary investments or temporary
borrowings at the end of each month (interest on these to be ignored).

3. From the following information relating to a departmental store, you are required to PREPARE
for the three months ending 31st March, 2019:-
(a) Month-wise cash budget on receipts and payments basis; and
(b) Statement of Sources and uses of funds for the three months period.
It is anticipated that the working capital at 1 st January, 2019 will be as follows:-

Rs. in ‘000’s
Cash in hand and at bank 545
Short term investments 300
Debtors 2,570
Stock 1,300
Trade creditors 2,110
Other creditors 200
Dividends payable 485
Tax due 320
Plant 800
Budgeted Profit Statement: Rs. in ‘000’s
January February March
Sales 2,100 1,800 1,700
Cost of sales 1,635 1,405 1,330
Gross Profit 465 395 370
Administrative, Selling and Distribution
Expenses 315 270 255
Net Profit before tax 150 125 115
 Budgeted balances at the end of each Rs. in
months: ‘000’s
31st Jan. 28th Feb. 31st March
Short term investments 700 --- 200
Debtors 2,600 2,500 2,350
Stock 1,200 1,100 1,000
Trade creditors 2,000 1,950 1,900
Other creditors 200 200 200
Dividends payable 485 -- --
Tax due 320 320 320
Plant (depreciation ignored) 800 1,600 1,550
Depreciation amount to Rs. 60,000 is included in the budgeted expenditure for each month.

4. A firm maintains a separate account for cash disbursement. Total disbursement are Rs. 1,05,000 per
month or Rs. 12,60,000 per year. Administrative and transaction cost of transferring cash to
disbursement account is Rs. 20 per transfer. Marketable securities yield is 8% per annum.
DETERMINE the optimum cash balance according to William J. Baumol model.

5. United Industries Ltd. projects that cash outlays of Rs. 37,50,000 will occur uniformly throughout
the coming year. United plans to meet its cash requirements by periodically selling marketable
securities from its portfolio. The firm’s marketable securities are invested to earn 12% and the
cost per transaction of converting securities to cash is Rs. 40.
a. Use the Baumol Model to determine the optimal transaction size of marketable securities
to cash.
b. What will be the company’s average cash balance?
c. How many transfers per year will be required?
d. What will be the total annual cost of maintaining cash balances?

6. Zion limited expects its cash flows to behave in a random manner, as assumed by Miller and Orr
model. Zion wants you to establish the return point and upper control limit. It provides the
following information:
i. Annual yield on marketable securities is 10%
ii. The fixed cost of effecting a marketable securities transaction is Rs. 2500.
iii. The standard deviation of the change in daily cash balance is Rs. 10000.
iv. The management wants to maintain a minimum cash balance of Rs. 200000.

7. The Cyberglobe Company has experienced a stochastic demand for its product. With the result
that cash balances fluctuate randomly. The standard deviation of daily net cash flows is Rs.1,000,
The company wants to impose upper and lower bound control limits for conversion of cash into
marketable securities and vice-versa. The current interest rate on marketable securities is 6%. The
fixed cost associated with each transfer is Rs.1,000 and minimum cash balance to be maintained
is Rs.10,000. Compute the upper and lower limits.
 COST MANAGEMENT

COST SHEET

The cost concept itself being subjective, there is no standard format in which the collected costs can be
presented. It has to suit the type of business, need of the details, and management’s requirement of
control over costs. Yet a simple way to show the Total Cost of any cost unit is shown below:

Specimen Cost Sheet

Period From …………………… Cost Units

To ……………………………………… …………

Cost Items Amount (Rs.) Amount (Rs.)

Direct Material Opening Stock Add: Purchases

Add: Incidental charges xxxxx xxxxx xxxxx

xxxxx
Less: Closing Stock xxxx

Direct Labour xxxxx

Direct Expenses xxxxx

PRIME COST xxxxx

Add: Production Overheads Add: Opening work in process xxxxx xxxxx

Less: Closing work in process

xxxxx xxxxx

FACTORY COST OR WORKS COST xxxxx

Add: Administrative Overheads xxxxx

COST OF GOODS MANUFACTURED xxxxx

Add: Opening Finished goods stock xxxxx

Less: Closing Finished goods stock xxxxx xxxxx

COST OF FINISHED GOODS SOLD xxxxx

Add: Selling & Distribution overheads xxxxx

COST OF GOODS SOLD xxxxx
 1. The following data relates to the manufacture of a standard product during the month of April,
20X8:

Raw materials Rs. 1,80,000

Direct wages Rs. 90,000
Machine hours worked (hours)10,000
Machine hour rate (per hour) Rs. 8
Administration overheads Rs. 35,000
Selling overheads (per unit) Rs. 5
Units produced 4,000
Units sold 3,600
Selling price per unit Rs. 125
You are required to PREPARE a cost sheet in respect of the above showing:

i. Cost per unit

ii. Profit for the month
2. The following information has been obtained from the records of ABC Corporation for the period
from June 1 to June 30, 20X8.

On June 1, 20X8 On June 30, 20X8

(Rs.) (Rs.)
Cost of raw materials 60,000 50,000

Cost of work-in-process 12,000 15,000

Cost of stock of finished goods 90,000 1,10,000

Purchase of raw materials during June’ 20X8 4,80,000

Wages paid 2,40,000

Factory overheads 1,00,000

Administration overheads (related to 50,000
production)
 Selling & distribution overheads 25,000

Sales 10,00,000
PREPARE a statement giving the following information:

i. Raw materials consumed;

ii. Prime cost;
iii. Factory cost;
iv. Cost of goods sold; and
v. Net profit.

3. The books of Adarsh Manufacturing Company present the following data for the month of April,
20X9:
Direct labour cost Rs. 17,500 being 175% of works overheads.

Cost of goods sold excluding administrative expenses Rs. 56,000.

Inventory accounts showed the following opening and closing balances:

April 1 in Rs. April 30 in Rs.

Raw materials 8000 10600

Work in progress 10500 14500

Finished goods 17600 19000

Other data are:

In Rs.
Selling expenses 3500

General and administration expenses 2500

Sales for the month 75000

You are required to:

i. COMPUTE the value of materials purchased.

ii. PREPARE a cost statement showing the various elements of cost and also the profit earned.
 4. A Ltd. Co. has capacity to produce 1,00,000 units of a product every month. Its works cost at
varying levels of production is as under:
Level Works cost per unit (Rs.)
10% 400

20% 390
30% 380

40% 370
50% 360

60% 350
70% 340

80% 330
90% 320

100 310
%

Its fixed administration expenses amount to Rs. 1,50,000 and fixed marketing expenses amount to Rs.
2,50,000 per month respectively. The variable distribution cost amounts to Rs. 30 per unit.

It can sell 100% of its output at Rs. 500 per unit provided it incurs the following further expenditure:

a. It gives gift items costing Rs. 30 per unit of sale

b. It has lucky draws every month giving the first prize of Rs. 50000; second prize of Rs. 25000, third
prize of Rs. 10000 and three consolation prizes of Rs. 5000 each to customers buying the product.
c. It spends Rs. 100000 on refreshments served every month to its customers.
d. it sponsors a television programme every week at a cost of Rs. 20,00,000 per month.
It can market 30% of its output at Rs. 550 per unit without incurring any of the expenses referred to in (a)
to (d) above.

PREPARE a cost sheet for the month showing total cost and profit at 30% and 100% capacity level.

5. Following data is available from the cost records of a company for the month of March 2017:
a. Opening stock of job under process as on 1st March 2017
 Job no. A 99: Direct Material Rs.80, Direct Wages Rs.150 and Factory Overheads Rs.200
 Job no. A 77: Direct Material Rs.420, Direct Wages Rs.450 and Factory Overheads Rs.400
b. Direct material issued during the month of February 2017 was:
 Job no A 99 Rs.120
 Job no A 77 Rs.280
  Job no A 66 Rs.225
 Job no A 55 Rs.300
c. Direct labour details for March 2017 were:
Job no Hours Amount (Rs.)
A 99 400 600
A 77 200 450
A 66 300 675
A 55 100 225
d. Factory Overheads are applied to jobs on production according to direct labour hour rate
which is Rs.2 per hour.
e. Factory Overhead incurred in March 2017 were Rs.2100.
f. Job numbers A 99 & A 77 were completed during the month. They were billed to the
customers at a price which included 15% of the price of the job for Selling & Distribution
expenses and another 10% of the price for Profit.
Prepare:

6. Prepare Cost Sheet for an engineering company which produces standard components in batches
of 1000 pieces each. A batch passes through three processes viz. Foundry, Machining & Assembly.
The materials used for a batch number 001 were: Foundry 1300 tonnes @ Rs.50 per tonne of
which 50 tonnes were sent back to stores.

Other details

Process Direct Labour Overheads

Foundry 200 Hrs @ Rs. 10Rs. 15 per Labour Hour

Machinin 100 Hrs @ Rs. 5 Rs. 20 per Labour Hour

g

Assembly 100 Hrs @ Rs. 15Rs. 10 per Labour Hour

A comparison of actual costs with estimated cost discloses that material and overheads have
exceeded the estimates by 20% whereas the estimated labour cost is 10% more than the actual.
Show the variances with respect to the estimates.

7. An advertising agency has received an enquiry for which you are supposed to submit the
quotation. Bill of material prepared by the production department for the job states the following
requirement of material:
 Paper 10 reams @ Rs.1800 per ream
 Ink and other printing material Rs.5000
 Binding material & other consumables Rs.3000
 Some photography is required for the job. The agency does not have a photographer as an
employee. It decides to hire one by paying Rs.10000 to him. Estimated job card prepared by
production department specifies that service of following employees will be required for this job:

 Artist (Rs.12000 per month) 80 hours

 Copywriter (Rs.10000 per month) 75 hours
 Client servicing (Rs.9000 per month)30 hours

The primary packing material will be required to the tune of Rs.4000. Production Overheads 40%
of direct cost, while the S & D Overheads are likely to be 25% on Production Cost. The agency
expects a profit of 20% on the quoted price. The agency works 25 days in a month and 6 hours a
day.

8. The following figures were extracted from the Trial Balance of a company as on 31st December
2016.

Particulars Debit Credit

Amount (Rs.) Amount (Rs.)

Opening Inventories

Raw Material 1,40,000

WIP 2,00,000

FG 80,000
Office Appliances 17,400

Plant and Machinery 4,60,500

Buildings 2,00,000
 Sales 7,68,000

Sales Returns 14,000

Material purchased 3,20,000

Freight on materials 16,000

Purchase returns 4,800

Direct labour 1,60,000

Indirect labour 18,000

Factory supervision 10,000

Factory repairs & upkeep 14,000

Heat, light & power 65,000

Rates & taxes 6,300

Misc factory expenses 18,700

Sales commission 33,600

Sales travelling 11,000

Sales Promotion 22,500

Distribution department salaries & wages18,000

Office salaries 8,600

Interest on borrowed funds 2,000

Further details are given as follows:

 Closing inventories are Material Rs.180000, WIP Rs.192000 & FG Rs.115000.

 Accrued expenses are Direct Labour Rs.8000, Indirect Labour Rs.1200 & interest Rs.2000.
 Depreciation should be provided as 5% on Office Appliances, 10% on Machinery and 4% on
Buildings. Heat, light and power are to be distributed in the ratio of 8:1:1 among factory, office
and distribution respectively.
 Rates & taxes apply as 2/3rd to the factory and 1/3rd to office.
 Depreciation on building to be distributed in the ratio of 8:1:1 among factory, office and
distribution respectively
Prepare a Cost Sheet showing all important components and also a condensed P & L Account for the year.

9. PR Ltd. manufactures and sells a typical brand of Tiffin Boxes under its on-brand name. The
installed capacity of the plant is 1,20,000 units per year distributable evenly over each month of
calendar year. The Cost Accountant of the company has informed the following cost structure of
 the product, which is as follows:
 Raw Material Rs. 20 per unit.
 Direct Labour Rs. 12 per unit
 Direct Expenses Rs. 2 per unit
 Variable Overheads Rs. 16 per unit.
 Fixed Overhead Rs. 3,00,000.
 Semi-variable Overheads are as follows:
o Rs. 7,500 per month upto 50% capacity & Additional Rs. 2,500 per month for every
additional 25% capacity utilization or part thereof.
o The plant was operating at 50% capacity during the first seven months of the
calendar year 2016, at 100% capacity in the remaining months of the year.
o The selling price for the period from 1st Jan, 2016 to 31st July, 2016 was fixed at Rs.
69 per unit. The firm has been monitoring the profitability and revising the selling
price to meet its annual profit target of Rs. 8,00,000. You are required to suggest the
selling price per unit for the period from 1st August 2016 to 31st December 2016.
Prepare Cost Sheet clearly showing the total and per unit cost and also profit for the
period.

from 1st Jan. to 31st July, 2016

from 1st Aug. to 31st Dec, 2016.

10. X Ltd. Provides you the following figures for the year 2015-16:

Particulars Amount (Rs.)

Direct Material 3,20,000

Direct Wages 8,00,000

Production Overheads (25% variable) 4,80,000

Administration Overheads (75% Fixed) 1,60,000

Selling and Distribution Overheads (2/3rd Fixed) 2,40,000

Sales @ Rs. 125 per unit 25,00,000

For the year 2016-17, it is estimated that:

a. Output and sales quantity will increase by 20% by incurring additional Advertisement
Expenses of Rs. 45,200.
b. Material prices will go up 10%.
c. Wage Rate will go up by 5% along with, increase in overall direct labour efficiency by 12%.
d. Variable Overheads will increase by 5%.
e. Fixed Production Overheads will increase by 33 1/3 %
Required:
 a. Calculate the Cost of Sales for the year 2015-2016 and 2016-2017.
b. Find out the new selling price for the year 2016-2017.
i. If the same amount of profit is to be earned as in 2015-2016.
ii. If the same percentage of profit to sales is to be earned as in 2015-2016.
iii. If the existing percentage of profit to sales is to be increased by 25%.
iv. If Profit per unit Rs. 10 is to be earned.
11. The following are the costing records for the year 2016 of a manufacturer:
Production 10,000 units; Cost of Raw Materials Rs. 2,00,000; Labour Cost Rs. 1,20,000; Factory Overheads

Rs. 80,000; Office Overheads Rs. 40,000; Selling Expenses Rs. 10,000, Rate of Profit 25% on the Selling
Price.

The manufacturer decided to produce 15,000 units in 2017. It is estimated that the cost of raw materials
will increase by 20%, the labour cost will increase by 10%, 50% of the overhead charges are fixed and the
other 50% are variable. The selling expenses per unit will be reduced by 20%. The rate of profit will
remain the same.

Prepare a Cost Statement for the year 2017 showing the total profit and selling price per unit.
 OVERHEADS
1. A factory has 3 production departments (P1, P2, P3) and 2 service departments (S1 & S2).
The following overheads & other information are extracted from the books for the month of
January 2016.
Expense Amount (Rs.)

Rent 6,000
Repair 3,600

Depreciation 2,700
Lighting 600

Supervision 9,000
Fire Insurance for stock 3,000

ESI contribution 900

Power 5,400

Particulars P1 P2 P3 S1 S2
Area sq ft 400 300 270 150 80
No. of workers 54 48 36 24 18
Wages 18,00015,000 12,0009,00 6,000
0
Value of plant 72,00054,000 48,0006,00
0
Stock Value 45,00027,000 18,000
Horse power of plant 600 400 300 150 50
Allocate or apportion the overheads among the various departments on suitable basis.
2. XL Ltd., has three production departments and four service departments. The expenses for
these departments as per Primary Distribution Summary are as follows:
Production Departments: (Rs.) (Rs.)
A 30,00,000
B 26,00,000
C 24,00,00080,00,000
Service Departments: (Rs.) (Rs.)
Stores 4,00,000
Time-keeping and 3,00,000
Accounts
Power 1,60,000
Canteen 1,00,000 9,60,000
The following information is also available in respect of the production departments:
Dept. A Dept. B Dept. C
Horse power of Machine 300 300 200
Number of workers 20 15 15
 Value of stores requisition in (Rs.)2,50,0001,50,0001,00,000
PREPARE a statement apportioning the costs of service departments over the production
departments.

3. A manufacturing company has two production departments Fabrication and Assembly and 3
service departments as Stores, Time Office and Maintenance. The departmental overheads
summary for the month of March 2016 is given below:
Fabrication - Rs.24000
Assembly - Rs.16000
Stores - Rs.5000
Time office - Rs.4000
Maintenance - Rs.3000
Other information relating to the department was:
Production departmentsService departments
Particulars Fabrication Assembly StoresTime officeMaintenance
No of employees 40 30 20 16 10
No of stores requisition slips24 20 6
Machine Hours 2400 1600
Apportion the costs of service departments to the production departments.

4. Suppose the expenses of two production departments A and B and two service departments
X and Y are as under:
Amount Apportionment Basis
(Rs.) Y A B
X 2,00,00 25% 40% 35%
0
Y 1,50,00 — 40% 60%
0
A 3,00,00
0
B 3,20,00
0
How will you apportion the overheads by step method or non-reciprocal method?
5. Service departments’ expenses
(Rs.)

Boiler House 3,00,000

Pump Room 60,000
3,60,000
The allocation is :
ProductionDepartmentsBoiler HousePump Room
A B
Boiler House 60% 35% – 5%
Pump Room 10% 40% 50% –
Distribute the service department overheads based on simultaneous equation method.
6. The summary as per primary distribution is as follows:
Production departments A- Rs.2400; B- Rs.2100 & C- Rs.1500 Service departments X –
Rs.700; Y- Rs.900
Expenses of service departments are distributed in the ratios of:
X dept. : A- 20%, B- 40%, C- 30% and Y- 10%
Y dept. : A- 40%, B- 20%, C- 20% and X- 20%
Show the distribution of service costs among A, B and C under repeated distribution and
simultaneous equation method.

7. In an Engineering Factory, the following particulars have been extracted for the quarter
ended 31st December, 2015. Compute the departmental overhead rate for each of the
production departments, assuming that overheads are recovered as a percentage of direct
wages.
Production Depts. Service Depts.
A B C X Y
Direct Wages (Rs.)30,00045,00060,00015,000 30,000
Direct Material 15,00030,00030,00022,500 22,500
No. of workers 1,500 2,250 2,250 750 750
Electricity KWH 6,000 4,500 3,000 1,500 1,500
Assets Value 60,00040,00030,00010,000 10,000
No. of Light points10 16 4 6 4
Area Sq. Yards 150 250 50 50 50
The expenses for the period were:
Amount (Rs.)
Power 1,100
Lighting 200
Stores Overhead 800
Welfare of Staff 3,000
Depreciation 30,000
Repairs 6,000
General Overheads 12,000
Rent and Taxes 550
Apportion the expenses of Service Dept. Y according to direct wages and those of Service
Department X in the ratio of 5: 3 : 2 to the production departments.

8. Sanz Ltd., is a manufacturing company having three production departments, ‘A’, ‘B’ and ‘C’
and two service departments ‘X’ and ‘Y’. The following is the budget for December 20X3:
Total (Rs.) A (Rs.) B (Rs.) C (Rs.) X (Rs.) Y (Rs.)
Direct material 1,00,0002,00,0004,00,0002,00,0001,00,000
Direct wages 5,00,0002,00,0008,00,0001,00,0002,00,000
Factory rent 4,00,000
Power 2,50,000
Depreciation 1,00,000
Other overheads 9,00,000
 Additional information:
Area (Sq. ft.) 500 250 500 250 500
Capital value of assets (Rs. lakhs) 20 40 20 10 10
Machine hours 1,000 2,000 4,000 1,000 1,000
Horse power of machines 50 40 20 15 25
A technical assessment of the apportionment of expenses of service departments is
as under:
A B C X Y
Service Dept. ‘X’ (%) 45 15 30 – 10
Service Dept. ‘Y’ (%) 60 35 – 5 –
Required:
 PREPARE a statement showing distribution of overheads to various departments.
 PREPARE a statement showing re-distribution of service departments expenses to
production departments using Trial and error and repeated distribution method.
 CALCULATE machine hour rates of the production departments ‘A’, ‘B’ and ‘C’.

9. The New Enterprises Ltd. has three producing departments A,B and C two service
Departments D and E. The following figures are extracted from the records of the Co.
Rs.
Rent and Rates 5,000
General Lighting 600
Indirect Wages 1,500
Power 1,500
Depreciation on Machinery 10,000
Sundries 10,000
The following further details are available:
Floor Space (Sq.Mts.) 2,000 2,500 3,000 2,000 500
Light Points 10 15 20 10 5
Direct Wages 3,000 2,000 3,000 1,500 500
H.P. of machines 60 30 50 10 --
Working hours 6,226 4,028 4,066 -- --
Value of Material 60,000 80,000 1,00,000 -- --
Value of Assets 1,20,000 1,60,000 2,00,000 10,000 10,000
The expenses of D and E are allocated as follows:
A B C D E
D 20% 30% 40% -- 10%
E 40% 20% 30% 10% --
What is the factory cost of an article if its raw material cost is Rs.50, labour cost Rs.30 and it passes
through Departments A, B and C. For 4, 5 & 3 hours respectively.
Break even Analysis and Marginal Costing
1. Rama Ltd. is selling at present, 8,000 units of a product at a selling price of Rs.20 per unit.
The variable cost is Rs.10 per unit and the fixed costs are Rs.60,000 per annum. The firm can
use the BE equation to answer the questions namely:
 i. What is the BE sales level for the firm?
ii. How many units the firm must sell to earn a profit of Rs.40,000.
iii. What will be the profit if the fixed costs are reduced by Rs.10,000 and the variable
costs are reduced by 10%.
iv. What selling price will give a profit of Rs.40,000 at the sales of 8,000 units.
v. How much extra sales must be made to meet the extra fixed cost of Rs.5,000.

2. There are two firm A Ltd. and B. Ltd. The sales and cost information for these two firms are
given below:

A Ltd. B Ltd.
Sales (Units) 10,000 10,000
Selling Price (per unit) Rs.20 Rs.20
Variable Cost (per unit) Rs.15 Rs.10
Fixed Cost Rs.40,000 Rs.90,000
Analyse the cost information.

3. You are given the following data:

Sales Profit
Year Rs.1,20,000 8,000
2018
Year Rs.1,40,000 13,000
2019
Find out:
(i) P/V Ratio,
(ii) B.E. Point,
(iii) Profit when sales are Rs.1,80,000
(iv) Sales required to earn a profit of Rs.12,000
(v) Margin of safety in year 2019

4. The sports material manufacturing company budgeted the following data for the coming year.

Amount (Rs.)
Sales (1,00,000 units) 1,00,000
Variable cost 40,000
Fixed cost 50,000
Find out
(a) P/V Ratio, B.E.P and Margin of Safety
(b) Evaluate the effect of
(i) 20% increase in physical sales volume
(ii) 20% decrease in physical sales volume
(iii) 5% increase in variable costs
(iv) 5% decrease in variable costs
(v) 10% increase in fixed costs
(vi) 10% decrease in fixed costs
(vii) 10% decreases in selling price and 10% increase in sales volume
(viii) 10% increase in selling price and 10% decrease in sales volume
(ix) Rs. 5,000 variable cost decrease accompanied by Rs. 15,000 increase in fixed
costs.
5. ABC Ltd. incurs fixed costs of Rs. 3,00,000 per annum. It is a single product company with
annual sales budgeted to be 70,000 units at a sales price of Rs. 300 per unit. Variable costs are
Rs. 285 per unit.
The company is deliberating upon an increase in the selling price of the product to Rs. 350 per
unit. This shall be required in order to improve the quality of the product. It is anticipated that
despite increase in the selling price the sales volume shall remain unaffected. However, the
fixed costs shall increase to Rs. 450,000 per annum and the variable costs to Rs. 330 per unit.
You are required to draw a profit volume graph, and determine the breakeven point. Also draw
on the same graph a second profit volume graph and give your comments.

6. You are given the following data for the year 20X7 of Rio Co. Ltd:
Variable cost 60,000 60%
Fixed cost 30,000 30%
Net profit 10,000 10%
Sales 1,00,000 100%
FIND OUT (a) Break-even point, (b) P/V ratio, and (c) Margin of safety. Also DRAW
a break-even chart showing contribution and profit.

7. Two businesses AB Ltd and CD Ltd sell the same type of product in the same
market. Their budgeted profits and loss accounts for the year ending 30th June,
2016 are as follows:
Amount
(Rs.)
AB Ltd CD Ltd
Sale 1,50,000 1,50,000
s
Less: Variable 1,20,000 1,00,000
costs
Fixed Cost 15,000 1,35,000 35,000 1,35,000
Profit 15,000 15,000
You are required to calculate the B.E.P of each business and state which business is likely to
earn greater profits in conditions.
i. Heavy demand for the product
ii. Low demand for the product.

8. A factory is currently working to 40% capacity and produces 10,000 units. At 50%
the selling price falls by 3%. At 90% capacity the selling price falls by 5%
accompanied by similar fall in prices of raw material. Estimate the profit of the
company at 50% and 90% capacity production.
The cost at present per unit is:
Material Rs. 10
Labour Rs. 3
Overheads Rs. 5(60% fixed)
The selling price per unit is Rs. 20/- per unit.

9. The sales turnover and profit during two periods were as follows:
 Amount (Rs.)

Period Sales Profit

1 2,00,000 20,000
2 3,00,000 40,000
What would be probable trading results with sales of Rs.1,80,000? What amount of sales will
yield a profit of Rs. 50,000?
10. The following results of a company for the last two years are as follows:
Amount (Rs.)
Year Sales Profit
2014 1,50,000 20,000
2015 1,70,000 25,000
You are required to calculate:
i. P/V Ratio
ii. B.E.P
iii. The sales required to earn a profit of Rs. 40,000
iv. Profit when sales are Rs. 2,50,000
v. Margin of safety at a profit of Rs. 50,000 and
vi. Variable costs of the two periods.

ABSORPTION COSTING AND MARGINAL COSTING

Income Statement (Absorption costing)

(Rs.)
Sales XXXXX
Production Costs:
Direct material consumed XXXXX
Direct labour cost XXXXX
Variable manufacturing overhead XXXXX
Fixed manufacturing overhead XXXXX
Cost of Production XXXXX
Add: Opening stock of finished goods XXXXX
(Value at cost of previous period’s production)
XXXXX
Less: Closing stock of finished goods XXXXX
(Value at production cost of current period) .
Cost of Goods Sold XXXXX
Add: (or less) Under (or over) absorption of fixed
Manufacturing overhead XXXXX
Add: Administration costs XXXXX
Selling and distribution costs XXXXX XXXXX
 Total Cost XXXXX
Profit (Sales – Total cost) XXXXX
Income Statement (Marginal costing)

(Rs.)
Sales XXXXX
Variable manufacturing costs:
– Direct material consumed XXXXX
– Direct labour XXXXX
– Variable manufacturing overhead XXXXX
Cost of Goods Produced XXXXX
Add: Opening stock of finished goods XXXXX
(Value at cost of previous period)
Less: Closing stock of finished goods (Value at current variable cost)

Cost of Goods Sold XXXXX

Add: Variable administration, selling and dist. overhead XXXXX

Total Variable Cost XXXXX

Add: Selling and distribution costs

Contribution (Sales – Total variable costs) XXXXX

Less: Fixed costs (Production, admin., selling and dist.) XXXXX

Net Profit XXXXX

1. Zen Ltd. supplies you the following data :

Direct material cost Rs.48,000

Direct wages Rs.22,000
Variable overheads – Factory Rs.13,000
- Adm. And selling Rs.2,000
Fixed overheads – Factory Rs.20,000
- Adm. and selling Rs.8,000
Sales Rs.1,25,000
Prepare an income statement under absorption costing and marginal costing
 2. XYZ Ltd. has a production capacity of 2,00,000 units per year. Normal capacity utilisation is
reckoned as 90%. Standard variable production costs are Rs.11 per unit. The fixed costs
are Rs. 3,60,000 per year. Variable selling costs are Rs.3 per unit and fixed selling costs are
Rs. 2,70,000 per year. The unit selling price is Rs.20
In the year just ended on 30th June, 2019, the production was 1,60,000 units and sales
were 1,50,000 units. The closing inventory on 30th June was 20,000 units. The actual
variable production costs for the year were Rs.35,000 higher than the standard.
(a) Calculate the profit for the year:
(a) By absorption costing method and
(b) By marginal costing method.
(ii) Explain the difference in the profits.

3. The following cost data is available from the records of M/s ZP Ltd., with regard to
their product ‘Milenium’ Selling price per unit Rs.60.00
Variable cost per unit Rs.36.00
Fixed cost per unit Rs.12.00
Normal output 1,00,000 units
Other additional data available for four consecutive periods are as under :

Period I Period II Period Period IV Total units

III
Opening – – 30,000 20,000 –
stock
Production 1,00,000 1,20,00 1,10,000 90,000 4,20,000
0
Sales 1,00,000 90,000 1,20,000 1,10,000 4,20,000
Closing stock – 30,000 20,000 –
You are required to prepare a statement showing profit for different periods, under both
marginal costing and absorption costing methods, showing under/over absorption of
overheads, if any, and also given your comments.

DECISION MAKING
1. The following data is given :

Product A Product B
Direct materials Rs. 24 14
Direct labour @ Rs.3 per hour Rs. 6 9
Variable overhead @ Rs.4 per Rs. 8 12
hour
Selling price Rs. 100 110
Standard time Rs. 2hrs 3hrs
State which product you would recommend to manufacture when:
(a) Labour time is the key factor
(b) Sales value is the key factor

2. The following particulars are extracted from the records of a company:

PER UNIT
 PRODUCT A PRODUCT B
Sales 100 120

(Rs.)
Consumption of material 2 Kg 3 Kg
Material cost 10 15

(Rs.)
Direct wages cost 15 10

(Rs.)
Direct expenses 5 6

(Rs.)
Machine hours used 3 Hrs 2 Hrs
Overhead expenses:
Fixed 5 10

(Rs.)
Variable 15 20

(Rs.)
Direct wages per hour is Rs. 5
a. Comment on profitability of each product (both use the same raw material) when :
i. Total sales potential in units is limited;
ii. Total sales potential in value is limited;
iii. Raw material is in short supply;
iv. Production capacity (in terms of machine hours) is the limiting factor.
b. Assuming raw material as the key factor, availability of which is 10,000 Kgs.
and each product cannot be sold more than 3,500 units find out the product mix
which will yield the maximum profit.

3. X Ltd. supplies spare parts to an air craft company Y Ltd. The production capacity
of X Ltd. facilitates production of any one spare part for a particular period of
time. The following are the cost and other information for the production of the
two different spare parts A and B:

Part A Part B
Per unit
Alloy usage 1.6 kgs. 1.6 kgs.
Machine Time: Machine 0.6 hrs 0.25 hrs.
A
Machine Time: Machine B 0.5 hrs. 0.55 hrs.
Target Price (Rs.) 145 115
Total hours available Machine A 4,000 hours
Machine B 4,500 hours
 Alloy available is 13,000 kgs. @ Rs. 12.50 per kg. Variable overheads
per machine hoursMachine A: Rs. 80 Machine B: Rs. 100
Required
i. IDENTIFY the spare part which will optimize contribution at the offered
price.
ii. If Y Ltd. reduces target price by 10% and offers Rs. 60 per hour of
unutilized machine hour, CALCULATE the total contribution from the
spare part identified above?

4. The profit for the year of R.J. Ltd. works out to 12.5% of the capital employed and
the relevant figures are as under:
Sales..............................................................................Rs. 5,00,000
Direct Materials...........................................................Rs. 2,50,000
Direct Labour….............................................................Rs. 1,00,000
Variable Overheads……………………………………………
Rs..................................................................................40,000
Capital Employed.........................................................Rs. 4,00,000
The new Sales Manager who has joined the company recently estimates for next year a
profit of about 23% on capital employed, provided the volume of sales is increased by 10%
and simultaneously there is an increase in Selling Price of 4% and an overall cost reduction
in all the elements of cost by 2%.
Required
FIND OUT by computing in detail the cost and profit for next year, whether the
proposal of Sales Manager can be adopted.

5. A company has a capacity of producing 1 lakh units of a certain product in a month. The
sales department reports that the following schedule of sales prices is possible.
VOLUME OF SELLING PRICE PER UNIT
PRODUCTION
% Rs.
60 0.90
70 0.80
80 0.75
90 0.67
100 0.61
The variable cost of manufacture between these levels is 15 paise per unit and fixed cost Rs.
40,000. Prepare a statement showing incremental revenue and differential cost at each
stage. At which volume of production will the profit be maximum?

6. The operating statement of a company is as follows:

Amount (Rs.)
Sales (80,000 @ Rs.15 each) 12,00,000
Costs:
Variable: (Rs.)
Material 2,40,000
Labour 3,20,000
Overhead 1,60,000
s
 7,20,000
Fixed Cost 3,20,000 10,40,000
PROFIT 1,60,000
The capacity of the plant is 1 lakh units. A customer from U.S.A. is
desirous of buying 20,000 units at a net price of Rs.10 per unit. Advice the
producer whether or not offer should be accepted. Will your advice be
different, if the customer is local one?

7. A company manufactures scooters and sells it at Rs.3,000 each. An increase of 17% in cost
of materials and of 20% of labour cost is anticipated. The increased cost in relation to the
present sales price would cause at 25% decrease in the amount of the present gross profit
per unit.
At present, material cost is 50%, wages 20% and overhead is 30% of cost of sales.
You are required to:
i. Prepare a statement of profit and loss per unit at present and;
ii. Compute the new selling price to produce the same percentage of profit to cost of
sales as before.

8. An umbrella manufacturer marks an average net profit of Rs. 2.50 per piece on a selling
price of Rs.14.30 by producing and selling 6,000 pieces or 60% of the capacity. His cost of
sales is
Amount (Rs.)
Direct material 3.50
Direct wages 1.25
Works overheads (50% fixed) 6.25
Sales overheads (25% variable) 0.80
During the current year, he intends to produce the same number but anticipates that
fixed charges will go up by 10% which direct labour rate and material will increase by
8% and 6% respectively but he has no option of increasing the selling price. Under this
situation, he obtains an offer for further 20% of the capacity. What minimum price you
will recommend for acceptance to ensure the manufacturer an overall profit of
Rs.16,730.

9. The Dynamic company has three divisions. Each of which makes a different
product. The budgeted data for the coming year are as follows:
Amount (Rs.)
A B C
Sales 1,12,000 56,000 84,000
Direct Material 14,000 7,000 14,000
Direct Labour 5,600 7,000 22,400
Direct 14,000 7,000 28,000
Expenses
Fixed Cost 28,000 14,000 28,000
61,600 35,000 92,400
The Management is considering to close down the division C’. There is no
possibility of reducing fixed cost. Advise whether or not division C’ should
be closed down.
 10. Mr. Young has Rs. 1,50,000 investment in a business. He wants a 15% profit on his money.
From an analysis of recent cost figures he finds that his variable cost of operating is 60%
of sales; his fixed costs are Rs.75,000 per year. Show supporting computations for each
answer.
(a) What sales volume must be obtained to break-even?
(b) What sales volume must be obtained to his 15% return on investment?
(c) Mr. Young estimates that even if he closed the doors of his business he would
incur Rs.25,000 expenses
per year. At what sales would be better off by locking his sales up?

11. The manager of a Co. provides you with the following information:
Amount (Rs.)
Sales 400000
Costs: Variable (60% of sales)
Fixed cost 80000
Profit before tax Income-tax (60%) 80000
Net profit 32000
The company is thinking of expanding the plant. The increased fixed cost with plant expansion will
be Rs.40,000. It is estimated that the maximum production in new plant will be worth Rs.2,40,000.
The company also wants to earn additional income Rs.3,200 on investment. On the basis of
computations give your opinion on plant expansion.
BUDGETING

1. Appex Co. can produce 4,000 units of a certain product at 100% capacity. The following
information is obtained from the books of account: .
April May

Units produced 2,800 3,600

Rs. Rs.
Power. 1,800 2,000
Repairs & 500 560
Maintenance
Indirect labour 700 900
Consumable stores 1,400 1,800
Salaries 1,000 1,000
Inspection 200 240
Depreciation 1,400 1,400
Direct material cost per unit is Re. 1, and direct wages per hour is Rs.4. The rate of production
per hour is 10 units. Compute the cost of production at 100%, 80% and 60% capacity showing
the variable, fixed and semi- fixed items under the flexible budget.

2. X Ltd. has provided you the following information:

Production capacity
Costs (Rs. Lakhs) 80% 60%
Direct Materials 2.00 1.50
Direct Labour 2.00 1.50
Direct expenses 1.60 1.20
Manufacturing 4.00 3.85
Expenses
 Administrative Expenses 4.00 3.80
Selling Expenses 4.00 3.75
Sales 20.00 15.00
Prepare a flexible budget at 50% and 90% capacity.

3. For the production of 10,000 electric automatic irons the following are the budgeted expenses:
Direct Material 60
(Per
unit )
Direct Labour 30
Variable overhead 25
Fixed overhead (Rs.1,50,000) 15
Variable expenses (direct) 5
Selling expenses (10% fixed) 15
Administration expenses (Rs 50,000 rigid for all levels of production) 5
Distribution expenses (20%) fixed 5
The total cost of sale per unit 160
Prepare a budget for the production of 6,000 and 7,000 and 8,000 irons showing distinctly
the marginal cost and the total cost.

4. The budget manager of Jaypee Electricals Ltd. is preparing a flexible budget for the
accounting year commencing from 1st April, 2017. The company produces on product- a
component – peekay. Direct material costs Rs. 7 per unit. Direct labour averages Rs. 2.50 per
hour and requires 1.60 hours to produce one unit of peekay. Salesmen are paid a
commission of Re. 1 per unit sold. Fixed-selling and administration expenses amount to Rs.
85,000 per year. Manufacturing overheads under specified condition of volume have been
estimated as follows:
Normal capacity of production of the company is 1,25,000 units. Prepare a budget of total
cost at 1,40,000 units of output.
Volume of production (Units) 1,20,000 1,50,000
Expenses: Rs. Rs.
Indirect material 2,64,000 3,30,000
Indirect labour 1,50,000 1,87,500
Inspection 90,000 1,12,500
Maintenance 84,000 1,02,000
Supervision 1,98,000 2,34,000
Depreciation - plant and equipment 90,000 90,000
Engineering services 94,000 94,000
Total manufacturing overheads 9,70,000 11,50,000

5.
Sales (in units) as per Sales Budget; Product A Product B
1st Quarter 2018 1,000 2,000
 2nd Quarter 2018 2,360 1,000
3rd Quarter 2018 2,160 1,250
4th Quarter 2018 2,480 750
Stock position as on 1.1.2018:
Percentage of 1st Quarter 2018 sales 20% 100%
Stock position ending 1st\ 2nd and 3rd Quarter 50% 50%
Percentage of Next Quarter’s sales
Stock position on 31.12.2018 2,200 1,000
Prepare Production Budget for the year 2018.

6. The following are the estimates sales of a company for eight months ending 30.11.2017:
Months Estimated Sales (units)
Apr 2017 12,000
June 2017 13,000
May 2017 9,000
July 2017 8,000
Aug 2017 10,000
Sep 2017 12,000
Oct 2017 14,000
Nov 2017 12,000
As a matter of policy, the company maintains the closing balance of finished goods and
raw materials as follows:
Stock item Closing balance of a month
Finished Goods 50% of the estimated sales for the next months
Prepare Production Budget (in units) of the company for the half year ending 30 Sep,
2017.

7. Prepare a Production Budget for three months ending March 31, 2016 for a
factory producing four products, on the basis of the following information.

Type of Product Estimated Stock on Estimated Sales Desired closing

Jan. during Jan. to stock on
1, 2016 Mar. 2016 31.3.2016
A 2,000 10,000 3,000
B 3,000 15,000 5,000
C 4,000 13,000 3,000
D 3,000 12,000 2,000

8. Budgeted production and production costs for the year ending 31st December are as follows:
PRODUCT- X PRODUCT -Y
Production (units) 2,20,000 2,40,000
 Direct material/unit Rs. 12.5 Rs.19.0
Direct wages/unit Rs. 4.5 Rs.7.0
Total factory overheads for each type of product (variable) Rs. 6,60,000 Rs.9,60,000
A company is manufacturing two products X and Y. A forecast about the number of
units to be sold in the first seven months is given below:
MONTH JAN FEB MAR APRIL MAY JUNE JULY
Product – 10,00 12,00 16,00 20,00 24,00 24,00 20,000
X 0 0 0 0 0 0
Y 28,00 28,00 24,00 20,00 16,00 16,00 18,000
0 0 0 0 0 0
It is anticipated that:
(a) There will be no work-in-progress at the end of any month.
(b) Finished units equal to half the sales for the next month will be in stock at the end of
each month (including December of previous year).
Prepare for 6 months ending 30th June a Production Budget.

STANDARD COSTING

1. Product A required 10 kg of material at a rate of Rs.4 per kg. The actual

consumption of material for the manufacturing product A comes to 12 kg of
material at the rate of Rs.4.50 per kg.
Calculate: (a) Material Cost Variance
(b) Material Usage Variance
(c) Material Price Variance.

2. From the following you are required to calculate

(a) Material Usage Variance
(b) Material Price Variance
(c) Material Cost Variance
Quantity of material purchased 3,000 units
Value of material purchased Rs. 9,000
Standard quantity of material required for one tonne of finished product 25
units
Standard rate of material Rs. 2 per unit
Opening stock of material NIL
Closing stock of material 500 units
Finished production during the period 80 tonnes

3. A manufacturing concern which has adopted standard costing furnishes the

following information.
Standard
Material for 70 Kg of finished product of 100 Kg
Price of materials Re.1 per kg
 Actual
Output 2,10,000 kg.
Material used 2,80,000 kg.
Cost of materials Rs. 2,52,000
Calculate:
a. Material Usage Variance
b. Material Price Variance
c. Material cost Variance

4. Using the following information calculate each of three labour variance for each
department.
Dept Dept Y
X
Gross wages direct 28,080 19,370

(Rs.)
Standard hours produced 8,640 6,015
Standard rate per hour 3 3.40

(Rs.)
Actual hours worked 8,200 6,395

ACTIVITY BASED COSTING

1. The cost accountant of ABC Manufacturing attended a workshop on activity-based costing

and was impressed by the results. After consulting with the production personnel, he
prepared the following information on cost drivers and the estimated volume for each driver.

Products Total
A B C
Units produced 25,000 15,000 5,000 45,000
Direct materials Cost Per Unit in Rs. 40.0 30.0 55.0
Direct labour in Rs. 15.0 15.0 15.0

Cost driver Cost driver volume Total

A B C
Number of setups 125 75 50 250
Machine Hours 2,500 1,500 2,000 6,000
Direct labour hours 25,000 15,000 5,000 45,000
Number of Inspection 50 25 25 100
The cost accountant also determined how much overhead costs were incurred in each of the four
activities as follows:
 Activity Overhead costs in
Rs.
Machining Setup 1,50,000
Machining 7,50,000
Total of Machining Overhead Cost 9,00,000
Assembly 360,000
Inspection 90,000
Total of Assembly Overhead Cost 4,50,000
Total Overhead Cost
13.50.000
Required:
a. Determine the cost driver rate for each activity cost pool.
b. Use the activity-based costing method to determine the unit cost for each product.

2. The Indiana Company produces only two products: a major computer part and cell phones.
The company uses a normal cost system and overhead costs are currently allocated using a
plant-wide overhead rate based on direct labor hours. Outside cost consultants have
recommended, however, that the company use activity-based costing to charge overhead to
products.
The company expects to produce 4,000 computer parts and 2,000 cell phones in 2013. Each
computer part requires two direct labor hours to produce and each cell phone requires one-half
hour to produce. The direct material and direct labor costs included in the two products are as
follows:

Item Computer Part Cell Phone

Direct Material (per unit) in Rs. 30 17
Direct labour cost per unit in Rs. 16 4
Budgeted (Estimated) Total Factory Overhead Data For 2013:

Activity Budgeted Overhead in Rs. Estimated Volume Level

Production Setups 80,000 20 setups
Material Handling 70,000 5,000 lbs.
Packaging and Shipping 120,000 6,000 boxes
Total Factory Overhead 270,000
Based on an analysis of the three overhead activities, it was estimated that the two products would
require these activities as follows in 2013

Activity Computer Part Cell Phone Total

Production Setups 5 15 20
Material handling (lbs) 1000 4000 5000
Packaging and Shipping 4000 2000 6000
(boxes)
Required:
1. Calculate the cost of each product using a plant-wide rate based on direct labor hours.
2. Calculate the activity cost rates for (a) setups, (b) material handling and (c) packaging and shipping.
3. Cost out the two products using an activity-based costing system.
 INVESTMENT MANAGEMENT

RISK AND RETURN

1. Following are the price and other details of three stocks for the year 20X1. Calculate the
total return as well as relative return for the three stocks.
Stoc Beginning
Dividend paid Ending price
k price
A 30 3.40 34
B 72 4.70 69
C 140 4.8 146

2. During the past five years, the returns of a stock were as follows:

Year 1 2 3 4 5
Retur 0.07 0.03 -0.09 0.06 0.10
n
Compute the following:
i. Cumulative wealth
ii. Arithmetic mean
iii. Geometric mean
iv. Variance and
v. Standard deviation

3. You are thinking of acquiring some shares of ABC limited. the rates of return expectations
are as follows:

Possible rate of return 0.05 0.10 0.08 0.11

Probability 0.20 0.40 0.10 0.30
Compute the expected rate of return E(R) and standard deviation on the investment.
4. A stock costing Rs. 120 pays no dividends. The possible prices that the stock might sell for at
the end of the year with the respective probabilities are:
Price 115 120 125 130 135 140
Probability 0.1 0.1 0.2 0.3 0.2 0.1
Required:
i. Calculate the expected return.
ii. Calcul ate the Standard deviation of returns.

5. Mr. A is interested to invest Rs. 1,00,000 in the securities market. He selected two securities
B and D for this purpose. The risk return profile of these securities are as follows:

Securit Risk ( s )Expected Return (ER)

y
B 10% 12%
D 18% 20%
 Co-efficient of correlation between B and D is 0 .15. You are required to calculate the
portfolio return of the following portfolios of B and D to be considered by A for his
investment.
i. 100 percent investment in B only;
ii. 50 percent of the fund in B and the rest 50 percent in D;
iii. 75 percent of the fund in B and the rest 25 percent in D; and
iv. 100 percent investment in D only.
Also indicate that which portfolio is best for him from risk as well as return point of view?
6. Consider the following information on two stocks, A and B:

Year Return on A (%) Return on B (%)

2006 10 12
2007 16 18
You are required to determine:
i. The expected return on a portfolio containing A and B in the proportion of 40% and 60%
respectively.
ii. The Standard Deviation of return from each of the two stocks.
iii. The covariance of returns from the two stocks.
iv. Correlation coefficient between the returns of the two stocks.
v. The risk of a portfolio containing A and B in the proportion of 40% and 60%.

7. Following is the data regarding six securities:

A B C D E F
Return (%) 8 8 12 4 9 8
Risk (Standard deviation) 4 5 12 4 5 6
i. Assuming three will have to be selected, state which ones will be picked.
ii. Assuming perfect correlation, show whether it is preferable to invest 75% in A and 25% in C
or to invest 100% in E

8. Stocks P and Q have the following historical returns —

Year 2009 2010 2011 20122013

Stock P’s Return (KP) -12.2423.6834.445.82 28.30
Stock Q’s Return (KQ)-7.00 25.5544.092.20 20.16
You are required to calculate the average rate of return for each stock during the period
2009 to 2013. Assume that someone held a Portfolio consisting of 50% of Stock P and 50% of
Stock Q. What would have been the realized rate of return on the Portfolio in each year from
2009 to 2013? What would be the average return on the Portfolio during the period? (You
may assume that year ended on 31st March).
9. Securities X and Y have standard deviations of 3% and 9%. Nitin is having a surplus of Rs.20
Lakhs for investment in these two securities. How much should he invest in each of these
securities to minimize risk, if the correlation co- efficient for X and Y is — (a) -1; (b) -0.30; (c)
0; (d) 0.60

10. An investor is considering two investment opportunities with the following risk and return
characteristics.
Project P Q
Expected 15%22%
 return
Risk 3% 7%
The investor plans to invest 80% of its available funds in share P and 20% in Q. the directors believe
that the correlation co-efficient between the returns of the shares is +1.0.
Required—
i. Calculate the returns from the proposed portfolio of shares P and Q.
ii. Calculate the risk of the portfolio;
iii. Suppose the correlation coefficient between P and Q was -1. How should the
company invest its funds in order to obtain zero risk portfolio.

BOND VALUATION PROBLEMS

1. A Rs. 100 par value bond bearing a coupon rate of 12% will mature after 5 years. What is the
value of the bond if the discount rate is 15 percent.

2. A market price of a Rs. 1000 par value bond carrying a coupon rate of 14 per cent and
maturing after 5 years is Rs. 1050. What is the yield to maturity on this bond? What is the
approximate YTM? What will be the realised yield to maturity if the investment rate is 12%

3. A Rs. 100 par value bond bears a coupon rate of 14% and matures after 5 years. Interest is
payable semi annually. Compute the value of the bond if the required rate of return is 16%.

4. Consider a 10 year, 12% coupon bond with a par value of Rs. 10,000. Assume that the
required yield on this bond is 13%. Find out the value of the bond.

5. Consider an 8 year, 12% coupon bond with a par value of Rs. 1000 on which interest is
payable semi-annually. The required rate of return on this bond is 14%. Find out the value of
the bond.

6. The following information is available on a bond:

Face value: Rs. 100

Coupon rate: 12% payable annually
Years to maturity: 6
Current market price: Rs. 110
What is the duration of the bond? Use the approximate formula for calculating the yield to
maturity.

7. A 10-year annual annuity has a yield of 9%. What is its duration?

8. A 10% coupon bond has a maturity of 12 years. It pays interest semi-annually. Its yield to
maturity is 4 percent per half year period. What is its duration?
9. A Rs. 100000 par five year maturity bond with 9% coupon rate paid annually currently sells
at a yield to maturity of 8%. A portfolio manager wants to forecast the total return on the
bond over the coming two years. As his horizon is two years. He believes that two years from
 now, three-year maturity bonds will sell at a yield of 7% and the coupon income can be
reinvested in the short-term securities over the next two years at a rate of 6%. What is the
expected annualised rate of return over the two-year period?

10. The equity stock of Rax Limited is currently selling for Rs. 30 per share. The dividend
expected next year is Rs. 2.00. the investors required rate of return on this stack is 15%. If
the constant growth model applies to Rax Limited, what is the expected growth?
11. Vardhaman Limited earnings and dividends have been growing at a rate of 18% per annum.
This growth rate is expected to continue for 4 years. After that the growth rate will fall to
12% for the next 4 years. Thereafter, the growth rate is expected to be 6% forever. If the last
dividend per share was Rs. 2.00 and investors required rate on Vardhaman’s equity is 15%,
what is the intrinsic value per share?
12. The current dividend on an equity share of Pioneer Technology is Rs. 3.00. Pioneer is
expected to enjoy an above normal growth rate of 40% for 5 years. Thereafter the growth
rate will fall and stabilise at 12%. Equity investors require a return of 15% from Pioneers
stock. What is the intrinsic value of the equity share of Pioneer?
13. The current dividend on equity share of National Computers Limited is Rs. 5.00. the present
growth rate is 50%. However, this will decline linearly over a period of 8 years and then
stabilise at 10%. What is the intrinsic value of the share of National Computers if investors
require a return of 18% from its stocks?

MODERN PORTFOLIO THEORY

1. The following table gives an analyst expected return on two stocks for particular market
returns:
Market Aggressive Stock Defensive Stock
Return
6% 2% 8%
20 30 16
i. What are the betas of the two stocks?
ii. What is the expected return on each stock if the market return is equally likely to be
6% or 20%?
iii. If the risk-free rate is 7% and the market return is equally likely to be 6% or 20%
what is the SML?
iv. What are the alphas of the two stocks?

2. The rates of return on stock A and market portfolio for 15 periods are given below.
Period Return on Return on Period Return on Return on
stock A(%) portfolio (%) stock A (%) portfolio (%)
1 22 12 9 -8 1
2 13 14 10 13 12
3 17 13 11 14 -11
4 15 10 12 -15 16
5 14 9 13 25 8
6 18 13 14 9 7
 7 16 14 15 -9 10
8 6 7
What is the beta for stock A?
What is the characteristic line for stock A?

3. A company’s beta is 1.40. The market return is 14%. The risk-free rate is 10% (i) What is the
expected return based on CAPM (ii) If the risk premium on the market goes up by 2.5% points,
what would be the revised expected return on this stock?

4. Treasury Bills give a return of 5%. Market Return is 13% (i) What is the market risk premium (ii)
Compute the b Value and required returns for the following combination of investments.
Treasury Bill 100 70 30 0
Market 0 30 70 100

5. Pearl Ltd. expects that considering the current market prices, the equity shareholders should get a
return of at least 15.50% while the current return on the market is 12%. RBI has closed the latest
auction for Rs. 2500 crores of 182-day bills for the lowest bid of 4.3% although there were bidders
at a higher rate of 4.6% also for lots of less than Rs. 10 crores. What is Pearl Ltd’s Beta?

6. The following information is available with respect of Jaykay Ltd.

Jay Kay Limited Market
Year Return on
Govt.
Bonds
Average DPS Average Index Dividend Yield
Share (Rs. ) (%)
Price (Rs.
)
2002 242 20 1812 4 6
2003 279 25 1950 5 5
2004 305 30 2258 6 4
2005 322 35 2220 7 5
Compute Beta Value of the company as at the end of 2005. What is your observation?

7. The expected returns and Beta of three stocks are given below

Stock A B C
Expected Return 18 11 15
(%)
Beta Factor 1.7 0.6 1.2
If the risk-free rate is 9% and the expected rate of return on the market portfolio is
14% which of the above stocks are over, under or correctly valued in the market?
What shall be the strategy?
8. Information about return on an investment is as follows:
Risk free rate 10% (b) Market Return is 15% (c) Beta is 1.2
(i) What would be the return from this investment?
(ii) If the projected return is 18%, is the investment rightly valued?
(iii) What is your strategy?

9. The following details are given for X and Y companies’ stocks and the Bombay Sensex for
a period of one year. Calculate the systematic and unsystematic risk for the companies’
stocks. If equal amount of money is allocated for the stocks what would be the portfolio
risk?

X Y Stock Sensex
Stock
Average return 0.15 0.25 0.06
Variance of return 6.30 5.86 2.25
β 0.71 0.685
Correlation Co-efficient 0.424
Co-efficient of determination (r2) 0.18
1. A fund begins with Rs 100 million and reports the following results for three periods:
2. Period 1 2 3 Rate of return 7% 16% 10% Net inflow (end of period) Rs in million 10 2 0

Compute the arithmetic, time-weighted, and rupee-weighted average returns.